As the Guardian has reported:
Electricity bills will be reduced by an average of £45 a year from October, after Andy Burnham announced the government would remove VAT from them.
There are around 25 million domestic dwellings in the UK. Using that as the basis for estimation, this tax cut will result in reduced tax paid of maybe £1.1 billion or £1,100 million.
For reasons I do not understand, Downing Street said the cost will be £850 million. I cannot make that figure stack.
That said, there is a more important dimension to note, drawn to my attention by regular commentator on this blog, Mike Parr. As he has noted, the National Grid paid more than £1 billion in 2024 to manage bottlenecks in the electricity network. Ultimately, this cost is passed on to consumers, at roughly £50 per household. Note the coincidence.
About 24% of that money went to wind farms that were paid to reduce their output because the grid could not carry their electricity.
The remaining 76% went to gas-fired power stations, mainly in other parts of the country, to increase output to replace the unusable output of wind farms.
If the network could carry all the available wind power, Britain would need less gas-generated electricity. That would reduce costs further because plentiful wind power also pushes down wholesale electricity prices, potentially by more than half.
The situation was foreseeable 16 years ago, yet the necessary action was not taken. Ofgem delayed, while the government treated it largely as a regulatory problem instead of ensuring that the grid was upgraded. The costs were already substantial in 2024 and are expected to be even higher in 2025 and 2026.
Burnham is playing on the peripheries here. The real question is what is he going to do to make the National Grid fit for purpose, and the UK a low-carbon country?
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Well, for a start, the National Grid should be nationalised. It is a privatised monopoly, to which, I believe, most of the standing charge energy poll tax is paid to. A licence for them to print money.
Agreed
The bit that operates the network (gas & elec) is nationalised (by the tories as it happens). It is called NESO Ltd (you can see the details on Companies House)
The problem is, the internal narrative within NESO is still “markets are the solution”.
Mike,
What a bunch of morons! As you and I well know the solution is always ‘engineering’. And as the Duke of Wellington put it, an engineer is someone who can do for ten shillings what any fool can do for a pound.
Perhaps the real problem here is that politicians always seem to be ex lawyers and City gurus who went to Eton and then into an office instead of real people who know how stuff works.
As a single low user standing charges are punitive and I worked out I now pay more in standing charges than my total energy bills 10 years ago. Surely we should be encouraging energy use reduction and I would step the charges so the first chunk is relatively cheap and it steps up so as you use more you also pay a higher cost per unit. This would enable low users not to be penalised as they currently are and financially disincentivise higher usage.
Much to agree with
Over a year ago it was announced that standing charge free tariffs would be offered. At the time I commented that I did not think it would make he slightest difference, and they had a year to work out how to ensure the companies got the same income. I haven’t seen any standing charge free tariffs yet, has anyone else?
No
Whilst I agree that this cut in VAT does nothing to support the investment in a much-needed grid upgrade, Burnham and his team do urgently need to rebuild faith in politics amongst ordinary people who are suffering from the increased cost of living. Maybe this gesture will help in that regard, while we await a more coherent reframing of priorities and public spending in the next budget?
Agreed. My point is, gestures are not enough.
There is no guarantee that the companies will pass on the VAT cut.
How about creating a collaborative partnership between Government, industry, local authorities, finance providers and consumers to modernise the UK’s electricity grid, reduce reliance on fossil fuels and support the transition to a low-carbon economy?
Traditional procurement methods often encourage fragmentation, contractual disputes and cost overruns, and so aren’t fit for purpose to meet all the challenges facing the electricity network.
So, let’s establish a National Electricity Grid Alliance in which Government defines clear national outcomes while industry collaborates to deliver them.
The Alliance would:
1. Strengthen and modernise the national electricity grid.
2. Accelerate the connection of renewable energy sources.
3. Improve resilience and energy security.
4. Reduce dependence on fossil fuels.
5. Encourage innovation and improve value for money through collaborative working.
Government would provide strategic leadership, planning, regulation and targeted investment. Industry would contribute engineering expertise, innovation, delivery capability and private investment within a shared framework of agreed objectives.
Regional alliances could allow solutions to reflect local opportunities such as offshore wind, solar energy, battery storage and community energy schemes, while sharing successful approaches across the country.
Consumers could also become active partners through smart technologies, rooftop solar, battery storage and electric vehicles, helping to balance electricity demand and improve system resilience.
A National Electricity Grid Alliance would:
1. Deliver infrastructure more efficiently.
2. Reduce unnecessary contractual conflict.
3. Encourage innovation and knowledge sharing.
4. Improve long-term value for public investment.
5. Mobilise both public and private finance.
6. Support economic growth, energy security and the UK’s climate commitments.
The transition to a low-carbon electricity system is one of the UK’s greatest infrastructure challenges. By adopting an alliancing approach based on shared objectives, mutual trust and collaborative delivery, Government and industry could work together to create a more resilient, affordable and sustainable electricity network for future generations.
You make some good suggestions. But the kick off question needs to be: The choice of abstraction layer, how should we view the system?
One could start by looking at the electricity system as a physical system & ask: What are we trying to achieve? What are the boundary conditions? Where are the energy sources & sinks? What must be deterministic? What happens when the wind doesn’t blow etc. The current narrative from HMG and NESO is: let’s digitise to the max, lots of demand response (why?) etc etc. Expressed another way: measure everything, communicate with everything, expose everything to prices & orchestrate everything & therefore optimise the system. Won’t work. Sure orgs need to collaborate, but first there needs to be answers to the questions I posed and a common understanding amongst the key orgs (which does not exist).
Mike, thank you. I don’t think our views are actually very far apart.
I agree that the first task is to understand the electricity system as a whole. Questions such as what the system is trying to achieve, where generation and demand are located, what level of resilience is required, and how the system should cope with periods of low wind or solar output are fundamental. Without a shared understanding of those issues, it is difficult to design either the engineering or the governance.
My suggestion was aimed at a different level. Once those questions have been addressed, we still face the challenge of delivering the solutions. At present, Government, NESO, network operators, generators, manufacturers, local authorities, financiers and consumers often work within separate contractual and institutional frameworks. That fragmentation slows progress and creates conflicting incentives.
An alliancing approach would provide a governance framework in which the key participants work towards agreed system objectives, share information openly, manage risks collectively and are rewarded for delivering the overall outcome rather than individual organisational interests.
Indeed, one of the first tasks of the alliance could be to develop the common systems understanding that you argue is lacking. In that sense, the alliance is not a substitute for systems engineering; it is a mechanism for bringing together the people who need to develop and implement it.
There is also an opportunity to broaden the discussion beyond engineering. Modernising the electricity system is not simply a technical exercise. It also requires better integration between public investment, private finance, planning, regulation and local communities. Collaborative governance could help align these different elements behind a shared national purpose.
So I see your comments as strengthening the case for collaboration. You have identified the first task that a National Electricity Grid Alliance should undertake.
Also when is any Government going to decouple the gas price ?
This was promised at the start of the Ukraine war and as far as I can see NO PROGRESS has been made !!
Any while I’m on a rant Jackdaw should proceed on the basis the gas is sold directly to government and not via market, giving some secure energy. Rosebank shouldn’t as its oil will go direct to the market and does absolutely nothing for energy security
Agreed
£45 pa doesn’t sound much like a boost to people’s income. It reminds me of past media analyses of tax threshold increases announcing that they would mean people would have a whole extra £100 pa to spend, which never seemed very much to me…
However, would I be right in surmising that, with VAT on electricity being 5%, when this splendid sum of £45 is spent it will attract taxation of more than 5% in one way or another and so the ‘concession’ will be less costly to the government than is being made out? (Even allowing for the fact that it could just be saved by those who don’t really need it?)
Neatly argued….
The blanket 5% will disproportionately benefit the heaviest users, ie the wealthiest, further entrenching inequality and all its ills.
It would be nice to think that the new Burnham government is already taking Keynesian multiplier effects into account when costing government spending and tax cuts. Though I suspect that it’s more likely they’re guessing that the Gulf War will fizzle out and gas prices will come down in the medium term.
Well, I will enjoy my extra £45. I would rather get paid for the infrastructure work required to upgrade the grid, and enjoy the economic boost that would bring to my industry, but I will settle for the £45.
£45?
What a load of baloney.
So that’s going to get people onto the road of being engaged in politics again is it?
I don’t think so. Nope.
Null point!
This, I’m afraid – and I am genuinely very concerned about this, as we all should be.
A brief interlude
Great article, with which I agree. TL;DR:
A summer lull has created the impression that the UK’s economic, energy and environmental crises have eased. Growth is weak but positive, inflation has stabilised, fuel prices have fallen sharply and a new government has generated renewed optimism. Beneath that surface, however, the author argues that these improvements are temporary and potentially misleading.
The central claim is that a series of interconnected shocks is approaching. Diesel prices are expected to rise again as global supply shortages become apparent. Disruption to shipping through the Middle East and the Red Sea is increasing transport costs, threatening food supply chains and pushing future price increases onto consumers. At the same time, Europe faces growing energy insecurity ahead of winter, with concerns about gas supplies and the resilience of electricity systems increasingly dependent on intermittent renewable generation backed by insufficient storage.
The article argues that these immediate pressures reflect deeper structural problems. The global economy is said to be constrained by the rising energy cost of producing energy itself, reducing profitability, limiting credit creation and weakening economic growth. Recent geopolitical conflicts are interpreted as struggles over remaining viable oil resources rather than isolated foreign policy events, with the unintended consequence of making global supply chains even more fragile.
The UK is presented as especially vulnerable because of deindustrialisation, dependence on imported energy and food, and high electricity costs. The author also contends that climate policy has focused too heavily on decarbonisation while neglecting adaptation to unavoidable climate change.
Overall, the article argues that today’s apparent stability is masking a convergence of economic, energy and environmental pressures. Rather than celebrating short-term improvements, policymakers should be preparing for far more severe disruptions that may emerge over the coming months and years.
An excellent read, thank you. One of the links within the link is very relevant to the discussion on the national grid.
https://consciousnessofsheep.co.uk/2022/12/01/can-we-reboot-britain/
Only £45? Well, not for me. I am a heavy energy user as I live in a big house so I get a lot more. I don’t really need it and it won’t impact my spending/lifestyle.
Surely, a better idea would have been to cut standing charges.
Agreed
Dropping VAT on domestic electricity may seem a little ‘tinkering at the edges’, and indeed there are issues with sources like Derril Water being curtailed without being paid for their energy, but it’s reasonably progressive given the proportion of poorer households expenditure on energy compare to high income households.
I rather suspect that as a policy it’s deliberately small – indicating a direction of travel for policy change whilst not being an amount that’s going to spook the markets. Has Burnham decided that it’s easier to get a series of small changes past the financial markets rather than fewer, bigger policies?
Gesture politics
Listening to PM in the car on my way back to Germany earlier this evening it struck me that the getting rid of 5% VAT on electricity may make everyone better off by £45 per annum but I don’t get the cost to the treasury of £850m. Could not the 20% VAT being levied on the that £45 when spent exceed the money lost? Yes I know it will depend on what it is spent on, but even so…
Some of it, yes
That will make as much use to me like when i receive my additional pension increase of £0.25 per week when I reach the age of 80.
Why a tax cut, reducing revenue, and not a windfall tax on the privatised companies which have been making obscene profits?
Both, surely?